Clients confused over tax lawmaking

December 14, 2021 9:11 AM

Planning becomes particularly difficult when the deals, badmouthing and splintering partisan loyalties in Congress might — or might not — eventually determine how the average client files their taxes.

At least what confuses clients the most right now seems clear.

“That’s easy: all the tidbits of information that comes from the press long before something is actually enacted into law,” said Morris Armstrong, an Enrolled Agent and registered investment advisor at Armstrong Financial Strategies in Cheshire, Connecticut.

“What isn’t confusing?” said Ann Etter, a CPA and partner at Goodney & Associates, in Northfield, Minnesota. “We remind clients that the IRS has been underfunded and understaffed for several years now and that the Tax Code has changed multiple times in the past year.”

Here are some of the outstanding aspects of clients’ confusion.

Complexity reigns

“The tax forms have changed every year: 2018, 2019 and 2020. The Tax Code changed in the middle of the filing season of 2021, so taxes filed early in the season are generating IRS letters that are scary to many people — even if it means they’re getting a refund,” Etter said. “The people we work with have not needed complex tax scenarios for the past couple of decades. The Tax Code changes of 2018 made everything complex for anyone with more than a W-2.”

A little knowledge

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“The ongoing questions regarding refunds, stimulus amounts, Advance Child Tax Credits, taxability of unemployment and so on,” said Chris Hardy, an EA and managing director at Georgia-based Paramount Tax and Accounting. “Many clients have heard/read just enough to be dangerous in their understanding of how the intricacies work on the actual tax return.”

Wait for the actual law

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“Most confusing: all the misleading information circulated on the internet (and otherwise) to sell advertising about U.S. tax law and the process of how a bill becomes a law,” said EA John Dundon, president of Taxpayer Advocacy Services in Englewood, Colorado. “I encourage the exercise of patience by waiting for prospective legislation to be actually signed into law and, once signed into law, for accompanying regulations.”

All in the timing

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“We don’t necessarily find that clients are confused by the tax concepts of what may change. Things like higher ordinary income tax rates, higher capital gain rates, changes to estate tax exemption or step-up basis rules are generally easy to explain,” said Craig Richards, director of Tax Services at Fiduciary Trust International. “What we find that confuses clients is, the ‘Are they going to happen, and when?’ Questions such as, ‘Has the period for getting prior capital gain rates on a sale passed?’ or ‘Will the estate lifetime exclusion definitely be reduced?’ make it difficult for taxpayers to make [planning] decisions.”

Too much at once

A printout of Congress's tax reform bill, "The Tax Cuts and Jobs Act," alongside a stack of income tax regulations

“In all honesty, at times I too am uncertain whether something that has been discussed has actually made it into the law,” Armstrong said. “There’s something obscene about 3,000-page documents and maybe our government has to rethink the notion that disparate items can all be tossed together in one document.”

Whittling down the wish list

The 115th Congress convenes for the first time in 2017

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Bruce Primeau, a CPA and president of Summit Wealth Advocates in Prior Lake, Minnesota, equates the wheeling-dealing to a holiday practice of his daughter when she was young.

“She’d hand my wife and me a five-page Christmas list and say, ‘I know I’m not going to get everything on this list ….’ to which we’d respond, ‘You’re right, you won’t.’ Then we’d ask her to star four or five items that she really, really wanted and we considered those. The Democrats have handed the Republicans their five-page Christmas list and the Republicans are trying to get them to star the few items they really, really want so they can negotiate on those points,” Primeau said.

Laundry list

A close up of the capital building with an American flag

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“There’s been a global pandemic, several natural disasters, new tax law and political shifts of power. People are looking for customized solutions based on their particular facts,” said Brent Lipschultz, a CPA and partner of Personal Wealth Advisors at Top 100 Firm EisnerAmper. “Fortunately, the House deleted the estate planning provisions from their most recent draft, so it quiets down those estate planners who have had clients lining up for new trust documents.”

With potential tax changes looming as Congress debates proposals in President Biden’s “Build Back Better” agenda, “getting ahead of this uncertainty by discussing the potential changes makes us relevant to the client,” Lipschultz said.